Throwing the Books at Them: Amazon's Puzzling Long Run Pricing Strategy

Abstract

Firms competing for consumers to adopt new platforms have incentives to charge low prices to promote adoption, followed by higher prices later on. This study explores Amazon's dynamic pricing strategy by comparing its contemporary pricing on e-books, a relatively new product with complementary hardware and switching costs, with its pricing on physical books, a now-mature product without complementary hardware or switching costs. Using over 150,000 hourly observations on prices and sales ranks for electronic and physical bestseller books between 2012 and 2013, in conjunction with actual quantity data, we estimate the price elasticities of demand for books at Amazon. Despite inherent challenges in data availability and measurement, we find it surprising that both electronic and physical book prices fall substantially short of the static profit maximizing level two decades after Amazon's launch. These findings raise questions for both policymakers and shareholders.